The Wrong Investment Strategy detrimental to your goals?

Starting a business is even worse than investing in property. I wouldn't start one now.
Every investment is risky, but in some investments you can control your risk and in some you can't. That is the difference.

 

Are you saying you cant control risk with investing in property?

 

It's a risk to want to retire - give up cash flow and get into more debt.
Properties are not risky, neither is business. Day dreaming is what is risky.

 

Not with a click of a computer mouse in a second.
Ask those people in mining towns, can they control their risk NOW with ease? I don't think so.

 

A lot depends on how you retire and what you can do as a retired person. Some people can do a lot more for their wealth when they retire, than before they did this wise move.

 

Buying property in mining towns with the associated risk is very different to buying real estate in capital cities and that level of risk /control. I'm not sure how you can use the mining town risk as representative of wider property investment risk. ..

 

Easily. When mining boom was at it's best not a lot of people thought that it would ever end. When Sydney market was going up in the last 3 years, not a lot of people think that it will end. But it will end. And a lot of people will feel the pain of it ending, A lot more, than in mining towns.
It just takes time. Luckily our country is a VERY slow country in all aspects of life. Even crisis here comes very slowly, not like overseas - where you can experience the end of the world in a day.

 

Risk matrix is two dimensional based on severity and probability. Read Dr Alexander Elder on risk perception and response. A simple experiment used by him:

1. Walk on a table. Even if you fall, no damage.
2. Walk on a plank (the same width as a table) connecting two buildings 25 floors high. Probability of fall is the same. Perception and consequences of risk are escalated. This is leverage and the point @barnes was making. The leverage required for property (times median income) has gone up over 20 years, so what was falling from a table 20 years ago is equivalent to falling from a 25 storey ledge.

• Tenacious comparison at best.
• Risk depend on the asset class. Invest in debt, some forms have no risk.
• Business has a choice of the amount of leverage (E.g trade shares from as little as you want, develop apps, write e-books etc ). Property does not, unless you have the resources to buy it outright or indulge in property derivatives (E.g. REITs but even those are leveraged) .

 

Hey Skilled Migrant you are correct. I love Alexander Elder. His books were the first on trading that I have read in the past. He is a genius.
But only now after 10 plus years of trading I start to understand his concepts and philosophy.

 

This... ... is why I'm baulking at any more, but feel I should take a pause to realise some benefit.

 

You can't control what happens to you but you CAN control how you manage it. There are always ways, even when you screw things up.

 

Correct. Nothing lasts forever. Cycles change and in good times the herd gets cocky on the easy money. Best not to get complacent.

 

the stop losses with property is selling out prior to peak rationalising debt, does not mean you don't hold properties...god forbid

 

True. In some investments managing the position is more important than the entry level.

 

What I mean is that even when things go terribly wrong you can still manage it. There are always choices.

 

In all types of investing, if the investor does stupid, high risk stuff then the risk is going to be high no matter what.

An idiot can turn a relatively low risk investment into a higher one just as they can make a high risk investment an even higher one.

Risk lies with the individual. The investment markets are not good or bad. There is always opportunity for individuals who are able to accurately assess risk. Regardless, to try and compare mining towns to other more stable markets is ridiculous at best imo.

 

I am not against investing in property (I wouldn't be on this forum otherwise). My post was in relation to increased risk in property versus other asset classes (trading in this context). But having said that and at the risk of comparing apples with oranges, risk management tools in property (stop losses ?) do not come even close to share trading. Consider the following:

• Asset Pricing: It is hard (mathematically) to price the asset (property) given the inequity in asset units (no two properties are same) and opinion based pricing (valuer, REA etc) rather than market based pricing. Only statistical tools like median, average which come with their own margins of error are available for pricing the asset.
  
• Portfolio Pricing: The asset pricing error is magnified when holding a portfolio.
• Individual Stop Losses: Stop losses are dynamic (usually uni-directional) values expressed as a function of market value of the share. Given the ambiguity in pricing the asset itself, Stop loss for property can rarely be so well defined (e.g. darvas box), let alone executed (trailing) elegantly. No one picks up the peak or trough accurately.
  
• Portfolio Stop losses: Rationalising of debt is more of a financing issue rather than a portfolio stop loss, but it does show how intrinsic is leverage to property. Deleveraging might not even be a concern for trading shares. Thus the risk management in property is more of an exercise in guessing and staying ahead of the curve. APRA has toughened credit conditions, so must reduce debt, there is no correlation to the asset price as yet. In comparison consider shares, there is an elegant formula which tells you with certainty that your portfolio has undergone a x% loss, time to liquidate positions.
  
• Agility: The property is illliguid as compared to shares, so agility as one of the risk management strategies is ruled out.
• Risk spread over time: You can average up or down your share holdings in parcels over time in reaction to market. Usually cannot add or subtract kitchens or bathrooms to properties in response to markets.
• Control: Touched upon by @barnes The property market does not allow control of asset to the same level as shares because of the participants involved (Brokers, PMs, REAs, conveyancers, tenants, builders).
• Ineffectiveness : Given the high transaction costs (stamp duty) of 5% +2.5 % selling cost + levarage, the stop loss becomes ineffective as a risk mitigation strategy as the immediate equity loss is outside the range of stop losses that shares trade in.

But I like your risk management philosophy (risk avoidance than management) with regard to property as much I can understand on this forum. Old Naval Saying "A good navigator is not the one who gets the ship out of storm, but the one who avoids getting into the storm".

Maybe we need a thread on property risk avoidance and management.

 

Growth Mindset at work ? extract from The Growth Mindset : Telling Penguins to Flap Harder ?

However, what the “Growth Mindset” does is feed very nicely into that self-delusion. It is astonishing how quickly “Talent = effort + persistence” becomes “I am successful, therefore I worked hard; you are not as successful, therefore you cannot have worked as hard”, which rapidly becomes “I deserve everything I have; you deserve nothing”. The consequences of that sort of mindset are extremely grave for society as a whole, from the erosion of support for the welfare state, through tax avoidance, to the increasing categorization of the poor into “deserving” and “undeserving”. Hands up if you haven’t already noticed the growth of those themes in our society.


Of course, some might argue that the “growth mindset” is actually helpful in this regard, by giving children the belief that they can overcome their disadvantages and escape their background. This is, in my humble opinion, self-serving rot. If we as a society refuse to acknowledge that ability is, in fact, shaped by hugely influential forces which exist beyond the control of the individual, then we abdicate any responsibility for seeking to address those disadvantages. Redistributive taxation system ? No, people can all rise by their own efforts. Welfare system ? No, people are poor because they don’t try hard enough. Sure Start early years intervention to try and tackle some issues early? No, they can close the gap at school through their own efforts and those of their teachers.

 

Complete and utter nonsense.

We will never see eye to eye on most likely anything let's save time and stop replying to each other. Thanks.

 

Completely agree.